The Basic Financial Statements

The governmental fund statements are prepared on a different basis of accounting, known as modified accrual accounting. Modified accrual accounting is designed to reflect this unique focus on short-term fiscal accountability. To that end, we rewrite the fundamental equation of accounting for the modified accrual context as follows:

Assets + Deferred Outflows = Liabilities + Deferred Inflows + Fund Balance

In the governmental fund statements, we care most about fund balance – the difference between assets and liabilities in each fund. Fund balance is the most closely watched number in all governmental accounting. Taxpayers seem to understand that if a government is living within its means, then its assets should be greater than its liabilities, and it will report a positive fund balance. Policymakers seem to understand that ending the fiscal year with a positive fund balance means there is a bit of money to spend in the next fiscal year. That's why many fiscal policy and financial strategy discussions often come back to a simple "Goldilocks" question: Is our general fund balance too large, too small, or just right?

It is important to note that the change to reporting on a modified accrual basis does not apply to proprietary or fiduciary fund statements. In fact, proprietary and fiduciary fund statements are prepared using the same accounting basis used to prepare government-wide statements. So why prepare an additional set of financial statements if the same basis of accounting applies? Again, the idea goes back to the responsibility of governments to fulfill their fiscal accountability responsibility. More on this below.

The governmental fund statements report on a fund basis on activities in the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds. The city of Bothell reports fourteen separate funds in the governmental fund statements, four in its proprietary fund statements, and two in fiduciary funds. The larger the government or the more complex its operations are, the more likely it will report many funds.

Critics of government financial reporting often say that governments have too many funds. That is true. But government finances are complex. They are spread across many reporting units and serve various mandates. So, while fund statements are cumbersome, they are the best available means to ensure fiscal accountability. Below is a quick tour of the fund statements. We begin with a review of the governmental fund statements. 

Balance Sheet

GAAP requires governments to prepare a balance sheet that shows the assets, liabilities, and fund balance in every major governmental fund and the combined assets, liabilities, and fund balance in non-major funds.

Bothell's governmental fund Balance Sheet is presented here. It shows three discretely presented funds – the General Fund, two special revenue funds (Arterial Street and American Rescue Plan Act), and two capital projects funds (Capital Improvements and Public Safety Capital). All other funds are reported in aggregate in the "Other Governmental Funds." They include five special revenue funds (Street Fund, Park Reserve, Drug Forfeiture, Fire Impact Fee, and Public Safety Levy), three debt service funds (Public Safety GO Bond, 2013 GO Bond, and LIFT Bond), and a permanent fund (Cemetery Endowment).

Bothell's General Fund has $28.3 million in assets. General fund assets far exceed General Fund liabilities ($3.2 million). The city reports deferred inflows related to pre-paid property taxes, special assessments, and grants. While the focus is the General Fund, a significant proportion of resources are restricted and reported outside the General Fund. For the city of Bothell, the General Fund only accounts for 27 percent of the $106.3 million in assets.

The difference between assets and liabilities (net of deferred inflows and outflows) is Fund Balance. According to GAAP, there are five types of fund balance, each corresponding to the strength of restrictions on how fund balance resources can be spent:

• Non-spendable fund balance is, as the name suggests, not available for spending in the next fiscal period. Governments usually record non-spendable fund balances for items like inventory, legal settlements, small trust funds or endowment funds, or other long-term investments where the corpus of the investment must remain intact. Bothell did not report a non-spendable fund balance in any of its funds.
  
  
• The restricted fund balance, like restricted net assets, can only be spent on purposes prescribed in the government's constitution, enabling legislation, or some action from an external funder. Bothell, like many other local governments, reports restricted fund balance in the General fund ($1.01 million), special revenue fund ($4.8 million), capital projects funds ($43.9 million), and other non-major funds (including cemetery endowment fund $17.6 million) – for a total restricted fund balance of $67.3 million.
  
  
• Committed fund balance includes amounts that can be used for purposes determined by a governing body's formal action. State and local legislators will occasionally commit fund balances for capital projects or other one-time spending needs or for rainy-day funds or other budget stabilization funds designed to prevent spending cuts during an economic downturn. The city of Bothell committed $3.5 million in the General Fund and $67,692 in other non-major funds (specifically the Cemetery Endowment Fund). Like most local governments, the City of Bothell does not report a formal rainy day. In these instances, the unassigned fund balance becomes an important measure of liquidity (or short-term solvency).
  
  
• Assigned fund balance is restricted by some action other than a governing body commitment or other enforceable restrictions. Usually, this means restrictions that management places on fund balances without the approval of the governing body. The city of Bothell reported $1.7 million in the General Fund as an assigned fund balance. Note 20 in the Notes to the Financial Statements provides additional detail on fund balances. In this instance, the $1.7 million reported in the General Fund is currently assigned to capital projects. Unlike funds reported as committed or restricted, there is greater flexibility in reassigning funds to other uses. Therefore, we consider the assigned fund balance as an "informal" rainy day fund that management, not the governing body, maintains.
  
  
• The unassigned fund balance reports fund balances not subject to any restrictions. At the end of FY 2021, the city of Bothell reported $18 million in unassigned fund balance. Again, the General Fund's unassigned fund balance is one of the most closely watched indicators of a government's overall financial position.

Some readers review the governmental fund balance and ask an intuitive question. Do the fund balances in the governmental funds equal the net assets in the governmental activities we see on the government-wide Statement of Net Position? Fund balance and net assets are the residual left when we subtract liabilities from assets. If that is true, the fund balance should be equal to the net position. Except when we look at the two statements, it is quite evident they are not the same. Why? Again, this goes back to the basis of accounting used to prepare financial statements.

Government-wide statements are prepared using the accrual basis of accounting with an economic resource measurement focus. In contrast, governmental fund statements are prepared using the modified accrual basis of accounting with a focus on financial resource measurement. Given the current focus on financial resources measurement, there are no long-term assets or long-term obligations listed in the balance sheet. For this, and a variety of other reasons, the fund balance reported in the governmental fund statements differs substantively from the net position reported in the Statement of Net Position.

As noted earlier, the city of Bothell reports nine non-major funds, including (a) Street, (b) Park Cumulative Reserve, (c) Drug Forfeiture, (d) Fire Impact Fee, and (e) Public Safety Levy, (f) the 2013 General Obligation Bond, (g) the 2014 Local Infrastructure Financing Tool (LIFT) Bond, (j) Public Safety GO Bond and (k) the Cemetery Endowment Fund. Detailed information on every fund can be found in "Combining Financial Statements." The combined financial statements supplement the basic financial statements. The basic financial statements for governmental and proprietary funds have columns for each of the major funds and a single column in which all the nonmajor funds are aggregated. The combined statements provide the details of the nonmajor funds in one column for each.

The "Combining Balance Sheet" reports assets, liabilities, and fund balances in each of these funds. Total assets reported here ($18.1 million) are also reported in a single column in the Balance Sheet included in the Basic Financial Statements (see second-to-last column titled "Other Governmental Funds"). Again, the main difference here is that we now know how these assets are reported in each non-major fund.

For example, we now know that the Public Safety Levy fund is the largest non-major fund ($6.3 million in assets). We also know that of the $5.1 million reported in the Street Fund, $1.8 million was in cash and cash equivalents, $3.1 million was in investments, and the remainder was in receivables. So why is reporting information in the combining statements important? If you are a resident of Bothell, you want to know if dedicated taxes for streets, parks, or public safety are reported in the appropriate special revenue fund – or that dedicated tax revenues are appropriately transferred from the General Fund to the special revenue fund. The Combining Financial Statements provide you with that additional information.

That said, there is not a lot of activity reported in the non-major funds. For that reason, the combined financial statements are relegated to the Required Supplementary Section of the ACFRs. The city reports fund balances in every special revenue fund and the sole permanent fund (i.e., the Cemetery Endowment fund). Two of the three debt service funds do not report fund balances. That is not unusual.